Experienced Healthcare Lawyers Understand the Regulatory Compliance Issues for Medical Mergers and Acquisitions

Our healthcare mergers and acquisitions lawyers comprehend the distinct compliance issues associated with merging and acquiring healthcare practices. Representing medical practitioners and businesses engaged in the buying and selling of healthcare practices, our healthcare transactional and M&A attorneys cover a spectrum of medical entities, including medical practices, hospitals, urgent care centers, dental practices, chiropractic practices, and other healthcare businesses.

We also possess the expertise to handle transactions involving:

• Addiction and rehab health facilities
• Behavioral health practices
• Cosmetics companies
• Dietary supplement companies
• Diagnostic imaging companies
• Long-term care facilities
• Health information companies
• Healthcare software and technology companies
• Home healthcare
• Medical groups
• Medical device manufacturers
• Medical marijuana (cannabis) companies
• Medical spas
• Mobile medical app makers
• OTC drug companies
• Pharmacies
• Physician practices

Why do medical practices consider selling or merging their practices?

As previously discussed, the owners of a medical practice may contemplate selling or merging their practice for various reasons, including:

• A physician nearing retirement
• The potential for improved business and medical experiences through selling or merging the practice
• A new doctor seeking to enhance their practice by acquiring an existing medical practice
• One or more physicians who own the practice or are employees of the practice may wish to relocate.

What types of legal issues are involved in the purchases and sale of a medical practice?

When a medical practice undergoes a purchase, sale, or merger, both sellers and buyers must comprehend their rights and obligations. Additionally, they need to recognize the rights of medical patients, ensuring timely notice of the transaction, control over their health information, and various other rights. Employees and contractors may also have rights contingent on federal laws, state laws, and contractual arrangements.

Several legal documents involved in buying, selling, and merging medical companies include:

• Leases and subleases
• Management agreements
• Offering memoranda
• Operating agreements
• Technology transfer agreements
• Partnership agreements
• Joint venture agreements
• Other legal contracts

What are some of the regulatory issues involved in M&A deals?

Some of the regulatory compliance issues involved in medical mergers and acquisitions include:

Reviewing HIPAA Compliance Issues:

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) is a federal law that establishes national standards to safeguard sensitive patient health information from being disclosed without the patient’s consent or knowledge. HIPAA comprises a Privacy Rule and a Security Rule.

Reviewing Whether the Seller of the Medical Practices is in Violation of the Anti-Kickback Statute (AKS) or Stark Law:

Stark Law regulates referral arrangements between a medical practice and any other interests that a physician or family member of the physician may have in a related medical practice, such as a lab testing facility.

The Anti-Kickback Statute (AKS) prohibits doctors and the individuals or entities with whom they collaborate from providing financial incentives in return for referring patients.

Reviewing whether the sale, transfer, or merger may violate a state’s corporate practice of medicine laws is a crucial step in the due diligence process:

In California and some other states, regulations govern the ownership of medical practices. California’s Moscone-Knox Professional Corporation Act specifically outlines who can invest in and own a professional medical corporation, imposing limitations on the involvement of non-medical practitioners. The law emphasizes the necessity of maintaining a clear distinction between the medical care and research aspect of the practice and its administrative side, responsible for managing the business. Typically, only licensed physicians are allowed to hold a majority ownership interest in the medical side of the business, while investors, managed service organizations, and other non-professional managers may be involved in the administrative side.

Several critical compliance issues revolve around representations and warranties, including:

• Confirming that the healthcare business or practice being sold is eligible to receive payment under the Medicare and Medicaid programs and that the Seller is in substantial compliance with the conditions of participation in these federal healthcare programs.
• Ensuring that no employee or contractor has been excluded from Medicare, Medicaid, TRICARE, or any other federal healthcare program.
• Verifying that the confidentiality of patient records and data has been maintained.

Experienced lawyers comprehend both the structural aspects of the sale, including business concerns and legal requirements, and the regulatory compliance issues that are typically unique to the medical profession.

What are the “due diligence” requirements when purchasing or merging a medical practice?

The buyers of a medical practice must carefully review their due diligence obligations with a skilled healthcare lawyer when acquiring or merging with a medical practice:

• Healthcare Compliance: Your lawyer should comprehensively review all federal and state laws regulating the purchase and operation of any medical practice. This includes an assessment of the seller’s current compliance plan, any existing complaints, and identification of any red flags.
• Patient Notification: Patients of the medical practice have the right to be informed about the change in ownership. The letter to patients should clearly communicate this transition, ensuring they understand their rights to access and control their medical records, including their HIPAA rights. The communication should facilitate the patient’s choice of a new doctor without undue influence.
• Medical Records Ownership: The terms of the sale or merger should explicitly state who owns the medical records once the transaction is finalized.
• Billing and Coding: Buyers or merger participants need a comprehensive understanding of how bills and billing codes were and will be submitted. Proper arrangements should be in place for working with insurance carriers, and appropriate notifications must be made to Medicare, Medicaid, and other payors if the medical practice undergoes a change in ownership.
• License Requirements: Due diligence necessitates a review of the current medical licensure requirements for every medical professional involved in the transaction.
• Financial Records and Tax Statements: A thorough examination of financial records and tax statements for the past three years is essential.
• Current Working Relationships: The working relationships with staff, including nurses, technicians, receptionists, and others, should be assessed. Legal and practical considerations often require proper notification to staff about any sale, ensuring employees and contractors understand what to expect when ownership of the medical practice changes hands.

Additional due diligence issues encompass:

• Managed Service Organization (MSO): A thorough examination of the involvement or utilization of a Managed Service Organization in the medical practice’s operations.
• Existing Contracts: A comprehensive review of all current contracts with employees, contractors, administrators, suppliers, vendors, and third parties associated with the medical practice.
• Litigation Concerns: A detailed assessment of any ongoing or potential litigation matters related to the medical practice.
• Lease or Rental Agreements: Investigation of any outstanding or ongoing lease or rental agreements associated with the medical practice’s premises or equipment.

Addressing these issues during the due diligence process is critical to ensuring that the buyers have a complete and accurate understanding of the medical practice’s operations, obligations, and potential risks before finalizing the acquisition or merger.

What are some of the other legal issues involved in the purchase, sale, and merger of a medical business?

An experienced healthcare lawyer will examine the following issues, among many others, depending on whether the lawyer (firm) represents the buyer or the seller:

• Identifying what parts of the practice are being sold and what is not being sold
• The professional and personal obligations of each party to the sale
• The purchase/sale price, including the time to obtain financing
• What happens if the buyer cannot obtain financing
• The remedies for a breach of the agreement

A skilled healthcare lawyer will also review the following issues, among others, when the ownership of a medical practice is being changed:

• Drug Enforcement Agency requirements
• Insurance, including medical malpractice insurance issues
• Workers’ compensation claims
• The status of any current liabilities and possible future claims
• Any referral, Anti-Kickback Statute, or fee-splitting issues
• Non-compete clauses – which are generally illegal in California

How do the antitrust laws affect the sale, purchase, or merger of a medical practice?

When medical practices are sold, acquired, or merged, the transaction must comply with the Sherman Act, the Clayton Act, and the Federal Trade Commission Act.

The FTC explains these laws as follows:

The Sherman Act was passed in 1890. The FTC Act (which created the FTC) and the Clayton Act were passed in 1914. These antitrust laws (which have been amended) are designed to ensure that competition is fair and competitive for consumers and that businesses have strong incentives to “operate efficiently, keep prices down, and keep quality up.” These laws prohibit “unlawful mergers and business practices in general terms, leaving courts to decide which ones are illegal based on the facts of each case.”

The Sherman Act:

The Sherman Act outlaws:

“Every contract, combination, or conspiracy in restraint of trade,” and any “monopolization, attempted monopolization, or conspiracy or combination to monopolize.”

The Sherman Act applies to transactions that are unreasonable and not to every transaction. Acts that harm competition are considered illegal. Acts that are considered so egregious include arrangements by individuals and companies to “fix prices, divide markets, or rig bids.” These egregious acts are considered “per se” violations. There are no defenses or justifications for “per se” violations of the Sherman Act.

The penalties for violations are usually civil. Criminal charges can be filed by the US Department of Justice – such as when there is a clear intent to fix prices or rig bids. The criminal penalties may include “penalties of up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison.” The fine can be increased to “twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million.”

The Federal Trade Commission Act:

The Federal Trade Commission Act prohibits “unfair methods of competition” and “unfair or deceptive acts or practices.” The US Supreme Court has ruled that any violation of the Sherman Act also violates the FTC Act. While the US DOJ enforces the Sherman Act, the FTC can file cases under the FTC Act for activities that would also violate the Sherman Act. The FTC Act also applies to conduct that does not violate the Sherman Act but harms competition.

The Clayton Act:

The Clayton Act applies to specific practices that are not violations of the Sherman Act – such as mergers and interlocking directorates (that is, the same person making business decisions for competing companies).

Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”

The Clayton Act, amended by the Robinson-Patman Act of 1936, also prohibits certain “discriminatory prices, services, and allowances in dealings between merchants.” In 1876, the Clayton Act was amended again by the Hart-Scott-Rodino Antitrust Improvements Act. The latter Act requires that companies planning large mergers or acquisitions inform the US government of their plans in advance. Our healthcare lawyers help the parties to the merger provide timely and proper notice.

Under the provisions of the Clayton Act, private parties can seek triple damages if they were “harmed by conduct that violates either the Sherman or Clayton Act.” Private parties can also seek “a court order prohibiting the anticompetitive practice in the future.”

Most states also have their own antitrust laws that apply to selling, buying, and merging businesses, including medical practices.

Medical physicians and practices should consult with skilled healthcare compliance and healthcare M&A professionals when they want to sell, buy, or merge with another medical practice. Numerous federal and state laws regulate the sale or merger of medical practices, including Stark Law, the AKS, and the corporate practice of medicine. The parties to the transaction need to conduct due diligence to ensure they have addressed these regulations and the practical issues of transferring a medical practice. The rights of patients, employees, and other individuals and businesses who work with the medical practice all need to be reviewed by your healthcare lawyer.

Physicians and medical practices should contact Cohen Healthcare Law Group to discuss the requirements for buying, selling, and merging medical companies. Our experienced healthcare attorneys advise physicians and medical practices about healthcare compliance laws and regulations.

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